Interest rates play a powerful role in determining how businesses are valued. When rates rise or fall, they directly affect borrowing costs, investor expectations, and ultimately, EBITDA multiples, a key factor in how buyers and sellers assess company value.
The Connection Between Interest Rates and Valuation
Valuation multiples reflect what buyers are willing to pay for a company’s earnings. Interest rates influence this by shaping the cost of capital and expected return on investment:
• When rates fall, financing becomes cheaper, boosting buying power and often driving higher EBITDA multiples.
• When rates rise, borrowing costs increase, investors demand higher returns, and multiples tend to compress.
In simple terms, lower rates lift valuations, while higher rates create headwinds for deal pricing.
How Rate Changes Affect the Market
1. Cost of Financing: Higher interest rates increase debt service costs, limiting what acquirers can pay.
2. Investor Return Expectations: Rising rates push investors to seek greater returns, reducing their willingness to pay premium multiples.
3. Growth and Risk Outlook: When rates climb, future cash flows are discounted more heavily, lowering present value.
4. Deal Volume: In lower-rate environments, more buyers enter the market, creating competition and stronger valuations.
What It Means for Business Owners
• Sellers: Timing matters. Consider market conditions and rate trends when planning a sale. Strong cash flow and steady growth are key to sustaining value in a high-rate market.
• Buyers: Use disciplined valuation models and account for higher financing costs when assessing acquisition targets.
• Advisors and Investors: Monitor rate movements and adjust discount rates, growth projections, and deal structures accordingly.
Final Thoughts
Ultimately, interest rates are a key force shaping how businesses are valued. As they rise or fall, they influence investor confidence, financing options, and the prices buyers are willing to pay. Understanding this relationship helps business owners and investors make more informed decisions about timing, growth strategies, and long-term planning, no matter what direction the market moves next.
Jason Sanders | Managing Partner
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